Category: The Big Picture

Failure of western democracy, tensions between the US and China, the Arab Spring and other major global events.

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Iran attacks Israel

Markets are overshadowed by news that Iran directly attacked Israel in retaliation for the bombing of its embassy in Damascus which killed two high-ranking Iranian generals.

Iran

This is a significant escalation in Iran’s on-going proxy war against Israel.

Russia and its allies are emboldened by the US failure to support Ukraine and are stepping up their attacks on Western allies.

Iran

Mick Ryan (retired Australian Maj. General) writes:

…What is Iran’s ultimate goal here and its strategy to achieve it? This is a major shift in the way the Iranians have attacked Israel for years. Proxy forces are normally Iran’s preference in order to keep it at arm’s length from a potential Israeli response. Why has it decided on such a drastic course change in its strategy to confront Israel?

He lays out four options for retaliation — ranging from no direct response to a massive hammer blow to deter a repeat — and concludes:

All of these are possible in the hours and days ahead. All have advantages, as well as considerable disadvantages, for the Israelis. But one thing is certain, the concept of ‘re-establishing deterrence’ against Iran will be an important guiding idea.

And, it is uncertain whether the Iranians are really prepared for what they may have unleashed against their country and the wider region.

Flight to Safety

Given the high level of uncertainty, we can expect a significant flight to safe haven assets. Stocks are expected to weaken, with the S&P 500 breaching support at 5100 to signal a secondary correction.

S&P 500

The S&P 500 Equal-Weighted Index ($IQX) has already warned of a market move to risk-off after breaching support at 6650. A test of support at 6400 is likely.

S&P 500 Equal-Weighted Index ($IQX)

The Russelll 2000 Small Caps ETF (IWM) has similarly breached support at 200, warning of a correction to 190.

Russelll 2000 Small Caps ETF (IWM)

Brent crude is expected to test resistance at $96 per barrel.

Brent Crude

10-Year Treasury yields are already retracing and headed for a test of new support at 4.35%. Respect is likely, however, and would confirm an advance to test resistance at 5.0%.

10-Year Treasury Yield

The Dollar Index may not follow 10-year Treasury yields, with safe haven demand fueling a test of 107.

Dollar Index

Gold saw significant profit-taking on Friday after reaching our target of $2400 per ounce earlier in the day. Retracement is likely to respect support at $2300, followed by a strong advance fueled by safe-haven demand.

Spot Gold

The international contract on the Shanghai Gold Exchange (iAu99.99) is trading at 562 Yuan/gram. This equates to a USD price of $2415 per troy ounce — a sizable premium over Friday’s close at $2344.

Silver has retraced to test support at $28 per ounce. Respect is likely, signaling a test of resistance at $29 per ounce. Breakout above $29 would offer a long-term target of $36 per ounce.

Spot Silver

Bitcoin is consolidating below resistance at $72K. Breakout is likely and would offer a target of $92K, while reversal below support at $64K would warn of a correction to test $52K.

Bitcoin

Conclusion

Escalation in the Iran-Israel conflict is likely to drive crude oil prices to new highs as geopolitical risk rises. Inflationary pressures are expected to climb as a result, reducing the possibility of Fed rate cuts this year.

Other geopolitical factors could intervene, including the Saudis increasing production to hold crude oil prices below $100 per barrel. Above $100 is considered unsustainable by many producers and believed to lead to sharp falls in demand as the global economy contracts in response.

Financial markets, stocks and precious metals are likely to be dominated by safe-haven demand in the weeks ahead. A shift from small caps — and even the broad S&P 500 to the largest “magnificent seven” tech stocks — is expected as investors grow increasingly risk averse. Demand for Gold & Silver is expected to rise. The Dollar is likely to strengthen, along with short-/medium-term Treasuries. But long-term yields are unclear because of conflicting inflation/safe-haven pressures.

Acknowledgements

 

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Scientists say they can use AI to solve a key problem with nuclear fusion | CNN

Inside the JET tokamak, used to conduct major nuclear fusion experiments in the UK - United Kingdom Atomic Energy Authority

Inside the JET tokamak, used to conduct major nuclear fusion experiments – UK Atomic Energy Authority

CNN — Scientists pursuing fusion energy say they have found a way to overcome one of their biggest challenges to date — by using artificial intelligence.

Nuclear fusion has for decades been hailed as a near-limitless source of clean energy, in what would be a game-changing solution to the climate crisis. But experts have only achieved and sustained fusion energy for a few seconds, and many obstacles remain, including instabilities in the highly complex process….

Read More at CNN

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Alexei Navalny – the irresistible power of non-violent opposition

The Russian prison service reported that opposition leader Alexei Navalny had died “after falling ill on a walk today,” a few weeks after being transferred to a remote prison in the Arctic circle. Almost dying in 2020, after being poisoned with Novichock by the GRU, Navalny faced a difficult choice. Give up his struggle and live a comfortable life as an exiled dissident in the West or return to Russia where he would almost certainly be arrested and imprisoned on trumped up charges. He chose the latter. A mark of personal courage.

He was no doubt murdered by the regime ahead of the March presidential elections — where he had succeeded in orchestrating non-violent opposition to Russian leader Vladimir Putin from his prison cell.

Here is Navalny’s message to fellow Russians, from the documentary bearing his name:

President Biden’s response to his death:

Russia has a long history of non-violent resistance to oppression, including:

  • Aleksandr Solzhenitsyn — historian and author who raised global awareness of political repression in the gulags in the Soviet Union, awarded the Nobel Prize for literature in 1970;
  • Andrei Sakharov — nuclear physicist who was awarded the Nobel Peace Prize in 1975 for his efforts in the struggle for human rights in the Soviet Union and for nuclear disarmament; and
  • Another physicist, Boris Nemtsov, who led political opposition to Vladimir Putin until his assassination in 2015.

Alexei Navalny joins the list of global leaders who have dedicated their lives to non-violent opposition to oppression for the betterment of their fellow man:

Mohandas (Mahatma) Gandhi
Martin Luther King Jr.
Nelson Mandela
Bishop Desmond Tutu
and many others, including Aung San Suu Kyi (currently imprisoned in Myanmar) and Vladimir Kara-Murza (imprisoned in Russia), whose courage we should honor.

Water is fluid, soft, and yielding. But water will wear away rock, which is rigid and cannot yield. As a rule, whatever is fluid and yielding will overcome whatever is rigid and hard. That is the paradox: what is soft is strong.

~ Lao Tzu/Laozi, the Tao Te Ching (circa 400 BC)

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Thoughts on Israel

We express our sympathy for the people of Israel who have suffered a brutal attack from HAMAS and its backers.

An act of such barbarity is bound to evoke a response and lead to further escalation of violence in the region. But that seems to be the intention.

Martin Indyk, former US Ambassador to Israel (1995-1997 and 2000-2001) and special envoy under President Obama for Israeli-Palestinian negotiations (2013-2014), was asked why this occurred now, after progress seemed to be made on an Israel-Palestine settlement:

I think you have to consider the context at this moment. The Arab world is coming to terms with Israel. Saudi Arabia is talking about normalizing relations with Israel. As part of that potential deal, the United States is pressing Israel to make concessions to the Palestinian Authority—Hamas’s enemy. So this was an opportunity for Hamas and its Iranian backers to disrupt the whole process, which I think in retrospect was deeply threatening to both of them. I don’t think that Hamas follows dictation from Iran, but I do think they act in coordination, and they had a common interest in disrupting the progress that was underway and that was gaining a lot of support among Arab populations. The idea was to embarrass those Arab leaders who have made peace with Israel, or who might do so, and to prove that Hamas and Iran are the ones who are able to inflict military defeat on Israel.

There are talks going on regarding a peace deal between Israel and Saudi Arabia, and conversations about U.S. security guarantees for Saudi Arabia. In all likelihood, a primary motivation for Hamas and Iran was a desire to disrupt that deal, because it threatened to isolate them. And this was a very good way to destroy its prospects, at least in the near term. Once the Palestinian issue returns to front and center, and Arabs around the Middle East are watching American weapons in Israeli hands killing large numbers of Palestinians, that will ignite a very strong reaction….

….And in terms of escalation, the party to watch most closely is Hezbollah. If the Palestinian death toll rises, Hezbollah will be tempted to join the fray. They have 150,000 rockets they can rain down on Israel’s main cities, and that will lead to an all-out war not just in Gaza but in Lebanon, too. And everybody would get dragged in that situation. (Foreign Affairs)

Conclusion

The aim of the attack was to provoke a violent retaliation which would disrupt an Arab-Israeli peace accord.
Starting another war would play into the perpetrator’s hands.
Netanyahu prides himself on being cautious. Now is the time to show restraint, bolster Israel’s defenses and continue to pursue peace in the region — which would sideline HAMAS and its Iranian backers.

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Russia | Putin in Crisis

From Foreign Affairs, June 24th:

On Friday night, political infighting in Moscow spilled out into the open, with Yevgeny Prigozhin, the head of Russia’s Wagner mercenary group, accusing the Russian military of attacking his forces and vowing to retaliate. In messages published on his official Telegram channel, Prigozhin also claimed that all of the Kremlin’s publicly stated reasons for launching the war in Ukraine were lies. Following these developments, Russia’s state security agency, the FSB, opened a criminal case against Prigozhin, accusing him of calling for an armed rebellion….

Russian TV

Prigozhin has seized control of Rostov-on-Don, the major logistical hub for the war in Ukraine, with vast stockpiles of munitions and supplies. He now has complete control of Russia’s ability to continue the war in Ukraine, giving him a strong negotiating position to settle his dispute with the Kremlin.

Rostov-on-Don

Rostov-on-Don Interview

At this stage, an advance on Moscow seems unlikely.

It is dangerous to predict how events will unfold. Already the window for negotiations is closing.

Rostov-on-Don

There are reports of Wagner seizing a second major city on the road to Moscow, meeting little opposition.

Voronezh

Tom Nichols in The Atlantic:

“Think of this conflict not as a contest between the Russian state and a mercenary group, but a falling out among gangsters, a kind of Mafia war…..

But no matter how this ends, Prigozhin has shattered Putin’s narrative, torching the war as a needless and even criminal mistake. That’s a problem for Putin that could outlast this rebellion.”

Michael McFaul, former ambassador to Moscow under the Obama administration, in the Journal of Democracy, February 2023:

Putin’s luck ran out in 2022. By launching a full-scale, barbaric invasion of Ukraine one year ago, Putin has caused horrific bloodshed and suffering in Ukraine, hurting the very “brothers and sisters” he supposedly seeks to “protect” while also failing to achieve most of his war aims. But Putin’s war in Ukraine has also triggered deep damage to his own country, especially to Russia’s armed forces, the economy, society, and, in the long run, to his own regime. Ironically, Putin’s destruction of democracy in Russia decades ago created the conditions for this disastrous decision in 2022 — a decision that may eventually unravel the very autocracy that he constructed and has been consolidating for so long.

Conclusion

Autocracy has two major flaws. First, no one wants to give an autocrat bad news. Dictators only get told what they want to hear, leaving them badly out of touch. Poor decision-making is the inevitable result.

Second, suppression may quell dissent but leaves no release for the buildup of underlying pressures, creating the illusion of stability but fueling the potential to explode into violence at any time.

A breakdown of law and order in Russia, while it may have long-term benefits, is a dangerous situation that could easily spiral out of control. With disastrous consequences not only for the people of Russia but for surrounding regions within Russia’s “sphere of influence”. Belarus, Georgia, Syria, Armenia, Azerbaijan….. all are at risk of unrest as opposing factions attempt to take advantage of a distracted Kremlin.

It also increases the risk of high-risk behavior in Ukraine from the Kremlin.

Zaporizhzia

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Putin’s war

“The economy of imaginary wealth is being inevitably replaced by the economy of real and hard assets”.

Vladimir Putin gave some insight, last week, into his strategy to force Europe to withdraw its support for Ukraine. It involves two steps:

  1. Use energy shortages to drive up inflation;
  2. Use inflation to undermine confidence in the Euro and Dollar.

Will Putin succeed?

There are plenty of signs that Europe is experiencing economic distress.

When asked whether he expected a wave of bankruptcies at the end of winter, Robert Habeck, the German Federal Minister for Economic Affairs and Climate Action, replied:

Robert Habeck

Belgian PM Alexander De Croo also did not pull his punches:

“A few weeks like this and the European economy will just go into a full stop. The risk of that is de-industrialization and severe risk of fundamental social unrest.” (Twitter)

Steel plants are shutting down blast furnaces as rising energy prices make the cost of steel prohibitive. This is likely to have a domino effect on heavy industry and auto-manufacturers.

Europe: Steel Production

Aluminium smelters face similar challenges from rising energy costs.

Europe: Aluminium

How is the West responding?

Europe is reverting to coal to generate base-load power.

German Coal

And increasing shipments of LNG. Germany is building regasification plants and has leased floating LNG terminals but there are still bottlenecks as the network is not designed around receiving gas from Russia in the East, not ports in the West.

Europe LNG

Also, extending the life of nuclear power plants which were scheduled to be mothballed.

The new British prime minister, Liz Truss, is going further by lifting the ban on fracking. But new gas fields and related infrastructure will take years to build.

The President of the EC, Ursula von der Leyen’s announcement of increased investment in renewables will also be of little help. It takes about 7 years to build an offshore wind farm and the infrastructure to connect it to the grid.

Energy subsidies announced are likely to maintain current demand for energy instead of reducing it. A form of government stimulus, subsidies are also expected to increase inflation.

Price cap

The G7 has also responded by announcing a price cap on Russian oil. The hope is that the Russians will be forced to keep pumping but at a reduced price, avoiding the shortages likely under a full embargo.

Vladimir Putin, however, will try to create an energy crisis in an attempt to break Western resolve.

Russian Oil

Putin responded to the price cap at the Asian Economic Forum, on Wednesday, in Vladivostok:

“Russia is coping with the economic, financial and technological aggression of the West. I’m talking about aggression. There’s no other word for it…….

We will not supply anything at all if it is contrary to our interests, in this case economic. No gas, no oil, no coal, no fuel oil, nothing.”

Ed Morse at Citi has expressed concerns about the price cap, calling it “a poor judgement call as to timing.” His concerns focus on the political implications of Winter hardship in Europe, especially with upcoming elections in Italy, the potential effect of lower flows out of Russia, and the impact increased demand for US oil would have on domestic prices.

The Dollar

Attempts to undermine the Dollar have so far failed, with the Dollar Index climbing steadily as the Fed hikes interest rates.

Dollar Index

While Gold has fallen.

Spot Gold

Conclusion

The West is engaged in an economic war with Russia, while China and India sit on the sidelines. War typically results in massive fiscal deficits and soaring government debt, followed by high inflation and suppression of bond yields.

We expect high inflation caused by (1) energy shortages; and (2) government actions to alleviate hardships which threaten political upheaval.

The Fed and ECB are hiking interest rates to protect their currencies but that is likely to aggravate economic hardship and increase the need for government spending to alleviate political blow-back.

We maintain our bullish long-term view on Gold. Apart from its status as a safe haven — especially when the Dollar and Euro are under attack — we expect negative real interest rates to boost demand for Gold as a hedge against inflation. In the short-term, breach of support at $1700 per ounce would be bearish, while recovery above the descending trendline (above) would signal that a base is forming. Follow-through above $1800 would signal another test of resistance at $2000.

Acknowledgements

Brookings Institution: Discussion on the Price Cap
FT Energy Source: How Putin held Europe hostage over energy
Alfonso Peccatiello: Putin vs Europe – The Long War
Andreas Steno Larsen: What on earth is going on in European electricity markets?

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Optimism bias

As humans, we are programmed to assume our solutions will work. It is an important evolutionary trait. The military solution to this optimism bias is to assert deductive reasoning and the arrangement of a reserve capacity, to compensate when systems fail, resources run out, or solutions are exhausted…..

~ Rob Johnson

Comment: The equivalent for investors, to maintaining a reserve capacity, is position-sizing: never bet so much on any one trade that an adverse outcome, or string of adverse outcomes, would affect your ability to keep investing/trading.

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In the Ways That Count, Liz Cheney Won | Frank Bruni

Liz Cheney

Extract from Frank Bruni’s piece in the New York Times:

I know what the numbers say. I can read the returns. By those hard, cold, simplistic measures, Liz Cheney was defeated overwhelmingly in her House Republican primary in Wyoming on Tuesday night, and her time in Congress is winding down.

But it’s impossible for me to say that she lost.

She got many, many fewer votes than her opponent, an unscrupulous shape shifter unfit to shine her shoes, because she chose the tough world of truth over Donald Trump’s underworld of lies. That’s a moral victory.

She was spurned by conservatives in Wyoming because she had the clear-eyed vision to see Trump for what he is and — unlike Mitch McConnell and Kevin McCarthy, whose titles perversely include the word “leader” — she wouldn’t don a blindfold. That makes her a champion in the ways that count most.

Come January, she will no longer be Representative Cheney because she represents steadfast principle in an era with a devastating deficit of it. History will smile on her for that. It will remember the likes of McConnell and McCarthy for different, darker reasons. You tell me who’s the winner in this crowd…..

Conclusion

We try to stay out of party politics but Liz Cheney’s stand is about principle — the preservation of American democracy — which should be above politics. Sadly, that is no longer the case.

Related articles

Retired Admiral James Stavridis | Setting fire to the Wells – November 19, 2020
George Orwell | The appeal of Fascism – November 11, 2020
The Threat to Global Democracy – August 18, 2022
Thomas Homer-Dixon: The American polity is cracked, and might collapse. Canada must prepare, The Globe & Mail – January 2, 2022

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Funding both sides of the war | Thomas L Friedman

Our continued addiction to fossil fuels is bolstering Vladimir Putin’s petrodictatorship and creating a situation where we in the West are — yes, say it with me now — funding both sides of the war. We fund our military aid to Ukraine with our tax dollars and some of America’s allies fund Putin’s military with purchases of his oil and gas exports.

~ Thomas L Friedman, NY Times, May 17, 2022

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